Banco De La Research Articles

Editors’ Summary

Editors’ Summary Claudio Raddatz and Roberto Chang With the advent of the millennium several central banks in Latin America adopted inflation targeting (IT) as a framework for monetary policy analysis and implementation. In so doing, they joined the Reserve Bank of New Zealand and other central banks in advanced economies where IT had been credited with successfully reducing inflation at relatively little cost in terms of employment and growth. As recently discussed by Powell (2012) and Céspedes, Chang, and Velasco (forthcoming),1 however, the behavior of Latin American inflation targeters has sometimes differed notably from that of their advanced country counterparts. Perhaps this is clearest when one considers the role of the exchange rate: while flexible exchange rates are an integral part of conventional IT, Latin central banks have often intervened in foreign exchange markets. In fact, foreign exchange intervention has at times worked at odds with the inflation objective (Chang, 2007). Beyond exchange rate interventions, IT central banks in Latin America have resorted to policy tools other than a conventional reference interest rate. The use of such unconventional tools—which include reserve requirements, liquidity facilities, and central bank debt management—has actually become more frequent following the 2007–08 global financial crisis (see Montoro and Moreno, 2011, for example) in a way that seems complementary to standard policy tools (Powell, 2012). This trend reflects an ongoing reconsideration of the role of unconventional policies in IT, partly brought about by the need to find additional sources of monetary stimulus in advanced countries after policy rates were brought to their minimum level of zero. But, as emphasized in Powell (2012) and Céspedes, Chang, and Velasco (forthcoming), unconventional policies in Latin IT countries were often seen even before the global crisis. [End Page vii] This state of affairs has prompted an active debate on inflation targeting, its prospects, and its alternatives in the emerging world. This volume of Economía contributes to the debate by presenting five studies on the recent experience and performance of central bank policies in Latin American inflation-targeting countries, with emphasis on whether and how unconventional tools and objectives can be reconciled with received wisdom about IT. The studies, which were part of a project on these topics sponsored by the Red de Centros of the Inter-American Development Bank, attempt to provide a narrative of the experience of different IT countries. In addition, they implement various formal techniques in order to model aspects of unconventional policies and quantify their impact in Latin America. The paper by Franz Hamann, Marc Hofstetter, and Miguel Urrutia discusses Colombia’s recent experience, a main aspect of which is that the Banco de la República intervened often, and sometimes quite actively, in the foreign exchange market. According to the authors, these interventions were aimed at preventing excessive exchange rate appreciation, driven by strong inflows of foreign capital. Accordingly, they develop an extension of the basic New Keynesian model in order to allow for a role of the real exchange rate and foreign exchange intervention. The extension assumes that aggregate demand for domestic goods depends on the real exchange rate. In turn, the real exchange rate is determined by the interaction of the current account, the financial account of balance of payments, and a policy rule for foreign exchange intervention. The model is estimated to Colombian data via Bayesian techniques. Among other interesting findings, Hamann, Hofstetter, and Urrutia’s estimations indicate that their proposed foreign-exchange-intervention rule for the Banco de la República exhibits a significant response to perceived misalignments of the real exchange rate. On the other hand, they also find that the estimated coefficients of their model imply a very weak interaction between foreign sector variables, including the real exchange rate, and the model’s domestic block, which determines inflation, output, and interest rates. The conclusion is, then, that foreign exchange intervention in Colombia, while quite visible, has had negligible impact on the dynamics of main real aggregates. This raises the question of why the Banco de la República has bothered to intervene in the foreign exchange market at all. While the paper does not directly address this question, Hamann, Hofstetter, and Urrutia conjecture...

Inflation Targeting in Colombia, 2002–12

Inflation Targeting in Colombia, 2002–12 Franz Hamann (bio), Marc Hofstetter (bio), and Miguel Urrutia (bio) Over the last twenty years, nearly thirty countries have adopted inflation-targeting regimes to conduct monetary policy. In addition to the announcement of specific inflation targets, inflation-targeting regimes have been characterized by increased transparency, enhanced communication with the public, and explicit accountability mechanisms. Moreover, their policy strategy is based on setting short-run interest rates rather than on targeting monetary aggregates. In principle, inflation-targeting regimes also increase exchange rate flexibility. The performance of inflation-targeting regimes has been a matter of extensive research. For instance, Ball and Sheridan and Lin and Ye conclude that in industrialized countries, inflation targeting did not make a difference in inflation and output behavior.1 The spirit of these conclusions is echoed in two recent surveys on the performance of inflation targeting.2 Another line of research on inflation targeting in industrialized countries studies its impact on sacrifice ratios—output losses per point of inflation during monetary-driven disinflations. According to proponents, inflation targeting anchors inflation expectations, and it should thus allow for less costly disinflation processes. While Gonçalves and Carvalho find strong evidence supporting this hypothesis in developed countries, Brito shows that the results are not robust to the inclusion of time effects.3 De Roux and Hofstetter conclude that inflation [End Page 1] targeting allows for less costly disinflations even when controlling for time effects, but only if disinflations are slow.4 For fast disinflations, it does not yield less costly disinflations. For developing countries, the evidence is less conclusive. Gonçalves and Salles find that inflation targeting allows for a greater reduction in inflation and lower output volatility, a result confirmed by Lin and Ye.5 Brito and Bystedt, however, suggest that the greater inflation reduction came at the expense of poorer output growth.6 In the surveys, Walsh concludes that evidence on inflation targeting in developing countries is clearly favorable to the regime, while Ball is more skeptical, calling the outcomes inconclusive.7 More recently, de Carvalho Filho shows that during the recent global financial crisis, inflation-targeting nations outperformed non-inflation-targeting nations on several dimensions for both developed and developing economies: their policy response was more aggressive, they allowed the exchange rate to more effectively absorb the shocks, and they recorded a stronger macroeconomic performance (output, industrial production, and unemployment).8 The vast empirical literature comparing performance across different monetary regimes stands in contrast to the relatively scant research on the tools, strategies, goals, and dilemmas faced by inflation-targeting central banks, especially in developing countries. While there is good information on the overall comparative performance of these regimes, little information is available on the political economy dimensions, the increasing variety of instruments and goals of inflation-targeting central banks, and the challenges that lie ahead for them. In this paper, we fill part of this gap by examining the experience of the Central Bank of Colombia (Banco de la República) over the last decade, a period of consolidation and innovation of its inflation-targeting strategy. Colombia is one of five large Latin American economies that have well-established inflation-targeting regimes, along with Brazil, Chile, Mexico, and Peru. All of these countries adopted inflation targeting more than ten years ago, yet their performance, tools, and goals have not been extensively studied. Central banks in the region have used a variety of tools beyond short-run policy interest rates, including liquidity and reserve requirements, credit provisions, capital controls, and interventions in the foreign exchange markets. [End Page 2] We employ several strategies to study these issues. We propose and estimate a small-scale open economy policy model for the Colombian economy. This allows us to pinpoint crucial parameters through which we can study some of the policy trade-offs and policy reactions of the central bank. We also provide narrative and anecdotal evidence for understanding some important episodes, tools, challenges, and trade-offs that marked the first decade of inflation targeting. Several findings are worth noting. Our model’s estimates suggest that the impact of foreign variables on domestic outcomes is small and often insignificant. The pass-through of...

Un análisis VAR estructural de política monetaria en Colombia

<p>Este trabajo utiliza la metodología VAR estructural, con restricciones de corto plazo impuestas por el modelo macroeconómico de comportamiento AD-AS, para identificar las relaciones contemporáneas entre las variables endógenas del sistema que imponen las curvas oferta agregada, la LM y la MP. También se analizan los efectos dinámicos de choques en la tasa de intervención del Banco de la República sobre el crecimiento económico y la inflación. Los resultados de las curvas contemporáneas MP indican que hay una relación estadísticamente significativa y positiva contemporánea entre las variables tasa de intervención del Banco de la República y la inflación. El análisis dinámico vía respuesta impulso indica que solamente los choques positivos de las diferencias de la tasa de intervención tienen efectos negativos rezagados y cíclicos sobre la inflación. Choques positivos de política monetaria tienen efectos negativos y significativos sobre el crecimiento económico. A través de la descomposición de varianza se encontró que ante choques de política monetaria se presentan mayores efectos acumulados en el crecimiento económico que en la inflación, y en esta última solamente cuando la tasa de intervención está en diferencias.</p>

Scientific financial funding in Colombia from 2000 to 2012

This study evaluates trends in funding for Science, Technology and Innovation, Research and Development and COLCIENCIAS (Administrative Department for Science, Technology and Innovation) between 2000-2006 and 2007-2012. Available data from the World Bank, OCYT (Colombian observatory of science and technology), DANE (National statistics department), Banco de la Republica and COLCIENCIAS to evaluate funding source by sector (private, public and international), financial growth rate, financial expenditure, and activity related expenses from 2000 to 2012, and regression models to estimate financial trends. COLCIENCIAS funding increased in the past years; Science, Technology and Innovation, and Research and Development funding increased from $1,296.7 million US dollars in 2000-2006 to $2,766.4 million US dollars in 2007-2012. The financial analysis showed a significant increase in public funding mainly by government (p<0.05); however, government and corporation expenditure did not vary from 2000 to 2012.

Did Argentina Have a Currency Boards in the Mid 1880'S?

My research was part of a larger project to determine how currency board monetary systems have performed. The goal was to find information about the note issue of Argentina's Banco de la Provincia in the mid 1800's in order to determine if Argentina had a currency board system. I also tried to find answers to the questions of why the note issue arrangement was established, how it worked organizationally and why it was replaced.

Foreign Reserves’ Strategic Asset Allocation

Despite foreign reserves’ strategic asset allocation relies mainly on Modern Portfolio Theory (MPT), the unique characteristics of central banks obliges them to articulate and reconcile typical optimization procedures with reserves’ management objectives such as providing confidence regarding the ability to meet the country’s external commitments. Moreover, further involvedness come from broad economic factors as diverse as the openness of capital and current accounts, external debt’s maturity and currency composition, and exchange rate regime.Therefore, in order to alleviate the divergence from theory and practice regarding foreign reserves’ strategic asset allocation, this paper describes the methodologies and procedures developed and employed by the Foreign Reserves Department of Banco de la Republica. The mainstay of the paper is a long‐term‐dependence‐adjusted and non‐loss‐constrained version of the Black‐Litterman model for obtaining the efficient frontier from a set of investments complying with safety, liquidity and return criteria, where the choice of the portfolio which maximizes utility makes use of an estimation of the Board of Directors’ risk aversion.Results exhibit the effects of the unique nature of foreign reserves management for emerging markets. Typical features of foreign reserves management by central banks, such as non‐loss restrictions due to capital preservation objectives, result in increased complexity in the optimization process and in asset allocations significantly distant from standard MPT’s optimality.

Too-Connected-To-Fail Institutions and Payments System’s Stability: Assessing Challenges for Financial Authorities

The most recent episode of market turmoil exposed the limitations resulting from the traditional focus on too-big-to-fail institutions within an increasingly systemic-crisis-prone financial system, and encouraged the appearance of the too-connected-to-fail (TCTF) concept. The TCTF concept conveniently broadens the base of potential destabilizing institutions beyond the traditional banking-focused approach to systemic risk, but requires methodologies capable of coping with complex, cross-dependent, context-dependent and non-linear systems.After comprehensively introducing the rise of the TCTF concept, this paper presents a robust, parsimonious and powerful approach to identifying and assessing systemic risk within payments systems, and proposes some analytical routes for assessing financial authorities’ challenges. Banco de la Republica’s approach is based on a convenient mixture of network topology basics for identifying central institutions, and payments systems simulation techniques for quantifying the potential consequences of central institutions failing within Colombian large-value payments systems.Unlike econometrics or network topology alone, results consist of a rich set of quantitative outcomes that capture the complexity, cross-dependency, context-dependency and nonlinearity of payments systems, but conveniently disaggregated and dollar-denominated. These outcomes and the proposed analysis provide practical information for enhanced policy and decision-making, where the ability to measure each institution’s contribution to systemic risk may assist financial authorities in their task to achieve payments system’s stability.

Reconstructing Colombia's recent history of monetary policy from 1990 to 2010

Este articulo presenta una reconstruccion de la historia de la politica monetaria del Banco Central de Colombia (Banco de la Republica) en el periodo 1990 a 2010 durante el cual se implemento una politica explicita de metas de inflacion en octubre de 2000. Para lograr nuestro objetivo, desarrollamos una regla teorica de Taylor modificada con suavizacion de tasa de interes para una economia pequena y abierta; consecuentemente, estimamos un modelo de cambios de regimen (Markov switching) de dos regimenes, el cual admite que las fechas de cambio de regimen sean determinadas de manera endogena. Encontramos que uno de los regimenes, que corresponde al periodo 2000 a 2010, coincide con fijacion explicita de las metas de inflacion por parte del Banco de la Republica, en donde la tasa de inflacion tuvo un comportamiento de serie estacionaria, consistente con que el Banco de la Republica cumplio con el principio de Taylor. Dicho regimen de politica monetaria se habia presentado en algunos trimestres antes del 2000, pero no como el regimen predominante. El otro regimen prevalecio durante la decada de los noventa, pero no cumplio con el principio de Taylor en general debido a que permitio un comportamiento de raiz unitaria de la tasa de inflacion. Finalmente, no encontramos evidencia de que el Banco de la Republica haya cambiado su comportamiento en cuanto a las fluctuaciones del producto durante el periodo estudiado.

Del sombrero al árbol. Relatos icónicos de la nación colombiana

In four episodes the way is narrated as four objects of the movable patrimony became iconic stories of the Colombian nation: The first episode talks about to the painting of Pedro Jose Figueroa, Post Nubila Faebus. SIMON BOLIVAR, LIBERATOR y Padre de la patria, that makes the transit of the concepts of Freedom, Mother country, Colombia and Allegory of America. The second episode deals with the diffusion of “the Tree of the Freedom” in the Nuevo reino de Granada during the Illustration and the change that suffered due to the declaration of Independence. A work of anonymous author can be considered like the representation of the ceremony of seedtime of the tree. The rooted transit of the mother country concept is analyzed so, to its loss of prestige and at the present time, to its vindication. The third episode narrates of how the Poporo quimbaya got to become icon, between near 33,600 pieces of the Museo del Oro del Banco de la Republica. Their geometric form, the material and myth of El Dorado, contributed to their iconizacion. The fourth episode deals with the Virgen de Chiquinquira (La Chinca) (1556) tie to the miracle of the renovation in the society colony. The colony with independence, the devotion with the nationality connects itself. One concludes with a question on Whom it creates the representations of the nationality, the artist, the town, the museums? and on the validity of the iconografics representations.

Cambios de la Tasa de Política y su Efecto en la Estructura a Plazo de Colombia

Banco de la Republica, ColombiaThis paper analyzes the effects of changes of Banco de la Republica’s policy inter-est rate in the term structure. The evidence suggests that, in daily frequency, these reactions are not significant. However, with weekly data we found an anticipated reaction (one and three weeks before the movement) in the term structure in re-sponse to a change in the policy interest rate. Unfortunately the reaction has a “steepness effect” on the term structure, which may not support the expectations hypothesis of interest rates or may suggest a weak credibility and transparency of Banco de la Republica or both.JEL:

An XPS study of tarnishing of a gold mask from a pre-Columbian culture

The tarnishing originated on a hammered gold mask was analysed. Red tarnishing was observed after three years of storage in an indoor environment in the Gold Museum of Banco de la República, Bogotá, Colombia. Silver sulphide (Ag 2S) and silver sulphate (Ag 2SO 4) compounds were identified as the origin of the tarnishing phenomenon, which is attributed to environmental contamination. Atomic absorption spectroscopy (AAS) and X-ray photoelectron spectroscopy (XPS) techniques were used.

A model for exchange rates with crawling bands—an application to the Colombian peso

This paper builds upon previous research on currency bands, and provides a model for the Colombian peso. Stochastic differential equations are combined with information related to the Colombian currency band to estimate competing models of the behaviour of the Colombian peso within the limits of the currency band. The resulting moments of the density function for the simulated returns describe adequately most of the characteristics of the sample returns data. The factor included to account for the intra-marginal intervention performed to drive the rate towards the Central Parity accounts only for 6.5% of the daily change, which supports the argument that intervention, if performed by the Central Bank, it is not directed to push the currency towards the limits. Moreover, the credibility of the Colombian Central Bank, Banco de la República’s ability to defend the band seems low.

Banking and Finance in Argentina in the Period 1900-35

From 1900 to 1935, Argentina evolved from an economy highly dependent on external, primarily British, finance to one more nearly self-sufficient. The authors examine the failure of domestic finance to adequately fill the void left by the decline of London and the breakdown of the world financial system in the interwar period, when neither the Buenos Aires Bolsa nor the private domestic banks developed rapidly enough to fully replace British investors as efficient channels for financing private investment. One consequence is that Argentine investable funds were increasingly concentrated in a single institution, the Banco de la Nacion Argentina (BNA), creating a lopsided financial structure that was vulnerable to rent seeking and to authoritarian capture. Nevertheless, several measures, including gold reserves, interest rates, money supply, bank credit, and the market capitalization of domestic corporations, attest to the very high level of financial development achieved by Argentina.

Développement capitaliste et structures sociales des régions en Argentine (1880-1930)

La recherche des racines historiques des problèmes économiques, politiques et sociaux qui pèsent sur l'Amérique latine constitue, depuis des décennies, une constante préoccupation. Au cours des trente dernières années, un nombre important de publications, venant de tous les horizons, se sont essayées à trouver une explication de l'échec que connaissent les nations du sous-continent dans leurs tentatives pour créer les bases d'une croissance économique autonome. Cet article se situe parmi elles dans le courant des interprétations qui voient dans le développement du capitalisme l'une des clés essentielles pour la compréhension du passé et du présent. Notre but est d'analyser l'un des phénomènes fondamentaux de l'histoire de l'Amérique latine : la création d'un système de crédit à l'usage de l'économie d'exportation et des principaux groupes qui la contrôlent. Par son objet, cette étude dépasse le seul examen du secteur financier pour aborder les problèmes plus généraux de l'impérialisme et des modes de production.

Intergovernmental Committee for European Migration

The Council of the Intergovernmental Committee for European Migration (ICEM) held its fifth session in Geneva, October I–10, 1956; prior to the session the nine-nation Executive Committee held a private session beginning on September 20. After adopting the Director's progress report, a final 1956 movement program of 126,160 Europeans, and a budget of $44.5 million, the Council approved the 1957 plan for resettlement of 122,000 European migrants at a cost of nearly $44 million. Delegates from ten nations pledged contributions amounting to $680,680 for a special fund of nearly $1 million established by the Council for assistance to refugees and migration services. The ICEM Director, Harold H. Tittmann, reported the decline in 1956 of movements to Latin America, and suggested the possibility of increased migration to Colombia, which had accepted relatively few European migrants. A United States delegate (Walter) announced that the United States was prepared to allocate part of its $15 million Latin American Development Fund to promote land settlement programs in Latin America. He stated that the United States could not originate such programs, but required a Latin American nation to make land available for resettlement of migrants and a migrant-sending European nation to contribute its share of financial and economic assistance. In accordance with the United States offer the Argentine delegate said his government would set aside 70 plots of land to assist immigrants in the Melchior Romero colony near Buenos Aires. In addition, 23,000 hectares of land owned by the Banco de la Naoion and located in various parts of the country would be earmarked for other projects.